By Liam Vaughan & John Glover/Bloomberg
The UK’s looming “in-out” referendum on European Union membership has sparked jitters, with analysts predicting declines in everything from London property prices to the pound. But what would Brexit really mean for the City of London? Here are answers to common questions, based on research notes and interviews with analysts, lawyers and bankers.
What is at stake?
Financial services account for £180bn ($258bn) a year, about 12%, of UK economic output and contribute £66bn in taxes. In some areas, like foreign exchange trading (41% of the world total) and over-the counter derivatives (49%), London is the undisputed global leader. Opponents of a Brexit fear a departure would precipitate years of uncertainty and steady waning of influence and market share.
What is passporting and why does it
Under the current regime, any UK-authorised firm is free to do business in any other European Economic Area state by applying for a “passport” from British regulators. For non-EU banks like JPMorgan Chase & Co, Credit Suisse Group or Nomura Holdings, the ability to access the region’s 500mn customers from a base in London has been an important draw. Without it, many firms may seriously consider upping sticks.
An exit wouldn’t automatically mean an end to passporting rights, but the British prime minister would have to negotiate hard to keep them. The remaining EU members won’t want to incentivise other countries to follow suit. Loss of passporting could result in exports of financial services to the EU falling by half, or about £10bn, according to a study commissioned by fund manager Neil Woodford. Frankfurt and Paris would gladly pick up the pieces.
How would a Brexit work?
The problem with contingency planning is that talks on the UK’s future relationship with the bloc would only begin after a vote to leave, resulting in a two-year negotiation.
In the so-called Norwegian model, the UK leaves the EU but remains part of the EEA. In a “hard exit,” the UK loses influence over EU legislation and kisses goodbye to passporting. A middle scenario would see the UK retain passporting but secure autonomy over key issues outside of finance, such as immigration. That could be conditional on the UK ensuring its financial regulations are on par with those in the EU.
What would Brexit mean for the banks?
Every day more than $1tn worth of euros change hands in London, close to half the global total, according to the Bank for International Settlements.
The City’s global dominance of the foreign-exchange market is likely to be tested by any Brexit package that fails to guarantee a continuation of access to the single market.
Last year the European Central Bank lost its bid to force clearing houses handling euro-denominated trades to be based in the 19-nation eurozone. If it left the EU, Britain wouldn’t be so lucky again, and it may make little sense for firms to run their euro trading divisions outside of the EU, lawyers say.
Over-the-counter derivatives are another area for concern. About three-quarters of all trading in such instruments in Europe currently takes place in the British capital. Without access to the single market, much of that is likely to migrate, according to lawyers and bankers who say that US banks are already mulling moving operations. Still, London’s vast pool of skilled labour and back-office infrastructure will be tough to replicate, and mean any loss of market share may be a slow drip rather than a sharp decline.
What do the banks think of it all?
Most firms are drawing up contingency plans and keeping quiet until they know what they are up against, but a few have stuck their heads over the parapet.
HSBC Holdings has said that it will keep its headquarters in the UK, but may have to move 1,000 of its 5,000 London investment banking employees to Paris.
Goldman Sachs Group has put its weight behind staying in the EU, and expects to move some of its offices to continental Europe in the event of an exit vote.
Deutsche Bank co-CEO Juergen Fitschen said companies can contribute to the debate to help avoid “stupid decisions.” He also said London’s appeal as a “cultural centre” won’t change overnight.
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